The US economy grew by an annualized rate of 3.2% in Q1 2018 according to the initial release. The figure came out above the official expectations (2.1%), the Atlanta Fed ones (2.7%) and above the whispers (around 3%).

The outstanding headline stands out amid government shutdown that weighed on the economy in January. It also stands out against the fact that the first quarter of the year is usually weak. This is the first time the US economy grew by more than 3% in Q1 since Q1 2013.

So why did the US Dollar drop? 4 reasons

1) Buy the rumor, sell the fact: The greenback advanced on the upbeat Durable Goods Orders published on Thursday. Expectations were already sky high and the greenback had little room to rise.

2) Weak inflation: The headline PCE, or deflator, came out at 0.6% after 1.5% beforehand. Core PCE came out at only 1.3% against 1.8% beforehand.

3) Rise in inventories: When inventories are replenished in one quarter, they tend to be depleted in the following one. Inventories contributed 0.65% to growth, and subtracting this figure makes the headline less attractive.

4) Weak consumption growth: Personal consumption rose by 1.2% annualized in Q1, against 2.5% beforehand. The US economy is centered around consumption, and this component is the leading one.

Will the USD continue falling? Not so fast.

No hike

The largest economy in the world outperformed its peers in the past few quarters. The US economy was only marginally hit by the trade war with China. Exports are up 3.7%, and imports are down by the same scale.

The US consumer only took a short break, and the high level of employment helped avoid a downturn in the housing market.

The Federal Reserve hit the brakes on rate rises in March, completing its dovish shift and moving to neutral. Markets went further and expected a rate cut to come sooner or later, perhaps as soon as this year.

This seems somewhat premature now. The Fed’s insistence on patience means a rate hike is not their preferred path, but cutting the FFR has no justification, despite the markets’ wishes, as well as those of President Donald Trump.

What does it mean for the US Dollar?

A steady Fed can keep the US Dollar bid, but the USD is not alone.

The European Central Bank expects and perhaps prays for a recovery in the second half of the year, The Fed does not need to wait: the US economy is growing fast already now, in what is usually a slow quarter.

And the list goes on. The BOE is paralyzed by the Brexituncertainty. The BOJ just pledged to keep rates lower for longer. The Bank of Canada went to neutral, and the Reserve Bank of Australia is seen as cutting interest rate as soon as in the next meeting.

On this background, the USD remains “the cleanest shirt in the dirty pile” or even a just a plain clean shirt.

About Author

Yohay Elam – Founder, Writer and Editor
I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me.
Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.
Yohay's Google Profile

Top Brokers

About ForexCrunch

Forex Crunch is a site all about the foreign exchange market, which consists of news, opinions, daily and weekly forex analysis, technical analysis, tutorials, basics of the forex market, forex software posts, insights about the forex industry and whatever is related to Forex.

Disclaimer

Foreign exchange (Forex) trading carries a high level of risk and may not be suitable for all investors. The risk grows as the leverage is higher. Investment objectives, risk appetite and the trader's level of experience should be carefully weighed before entering the Forex market. There is always a possibility of losing some or all of your initial investment / deposit, so you should not invest money which you cannot afford to lose. The high risk that is involved with currency trading must be known to you. Please ask for advice from an independent financial advisor before entering this market. Any comments made on Forex Crunch or on other sites that have received permission to republish the content originating on Forex Crunch reflect the opinions of the individual authors and do not necessarily represent the opinions of any of Forex Crunch's authorized authors. Forex Crunch has not verified the accuracy or basis-in-fact of any claim or statement made by any independent author: Omissions and errors may occur. Any news, analysis, opinion, price quote or any other information contained on Forex Crunch and permitted re-published content should be taken as general market commentary. This is by no means investment advice. Forex Crunch will not accept liability for any damage, loss, including without limitation to, any profit or loss, which may either arise directly or indirectly from use of such information.